Can the Euro-Dollar Maintain Its Leadership in the FX Market?The Euro-Dollar is the best-performing major FX pair in 2025, and a short-term consolidation phase has begun below $1.18. This strength of the euro-dollar is surprising given the divergence in monetary policies. Can the euro-dollar go higher this year? How can this strength be explained fundamentally? In this week of ECB monetary policy decision (Thursday, July 24), let’s take a technical and fundamental look at the euro-dollar, which is stalling after reaching the technical resistance at $1.18.
1) Euro-Dollar’s Leadership in 2025 Defies the Logic of Monetary Policy Divergence
2025 is proving surprising in the FX market: the euro-dollar (EUR/USD) is the top-performing pair, with a gain of over 12% since the beginning of the year. This outperformance is puzzling if we rely on classic monetary fundamentals. The divergence between the Federal Reserve (Fed) and the European Central Bank (ECB) should favor the dollar.
The Fed maintains a prolonged monetary status quo with high rates due to persistent inflation and labor market tensions. In contrast, the ECB continued its rate-cutting cycle, reflecting a weaker European economy and better-contained inflation. Theoretically, this monetary asymmetry should have strengthened the dollar — yet the euro leads. This paradox is explained by a combination of fundamental factors.
2) Unexpected Fundamentals Are Driving the Euro-Dollar’s Strength in 2025
The euro-dollar’s bullish trend this year ignores the interest rate differential between the Fed and the ECB, both current and projected for the end of 2025.
Here’s a summary of the bullish fundamentals that allowed the euro-dollar to overlook monetary divergence:
• Trump administration’s fiscal policy raises concerns over U.S. debt sustainability (see long-term bond yields)
• Trade war initiated by the Trump administration creates economic slowdown risks for U.S. companies heavily reliant on international trade
• U.S. administration’s political will to improve currency competitiveness for exporters
• European stocks catching up to U.S. stocks in valuation
• Emerging markets’ will to diversify their public debt issuance
• Euro catching up as a global reserve currency as diversification away from the U.S. dollar
• Germany’s structural shift in fiscal and debt policy with massive investments in defense and industry
• EU stimulus spending and the ECB’s perceived monetary policy coherence
3) Is $1.18 the Final High for the Euro-Dollar in 2025? Probably Not.
The euro-dollar has been consolidating since early July after hitting $1.18. Is this the peak for the year? The answer is no — unless EUR/USD breaks below the $1.13/$1.15 support and unless institutional net positions reverse from their upward trend (see yellow line in CFTC COT data).
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